Shenzhen’s economy under strain: blame the trade war?

November 15, 2019

‘Shenzhen speed’ is normally a compliment, describing how the southern Chinese city gets things done at a rapid rate. But a downturn in its economy in the third quarter has been equally accelerated, casting doubt on its reputation as a pacesetter for the nation. The local media has been wondering if it’s a sign of worse to come..

Growth in the first three quarters of 6.6% was substantially down on the same period last year, and a lot slower than the first six months of this year.

Indeed, the implication is that the economy barely grew at all between July and September.

News that Shenzhen is losing steam has seemed more ominous because it is home to some of the country’s most dynamic companies and newest industries. But the consensus in the local media is that the city is primarily a victim of external events. As one of China’s more export-focused economies it is feeling the effects of the tariff row with Washington more than most, while American efforts to strangle overseas sales at companies like Huawei – Shenzhen’s biggest overseas brand – will hardly have helped.

“The city’s industrial structure is extremely distorted… its manufacturing industry is almost completely lost,” Sina says. “The financial and real estate industries are profitable, and incomes for its employees are high. But only a small number of people are benefiting and others aren’t seeing the same improvements in their quality of life.”

Another point being made about the economic chill of the last few months is that it shows how Shenzhen has transitioned away from a state-driven model into an economy more reliant on private sector activity. Analysts have highlighted the steep plunge in private sector investment, for instance, which barely grew in the January to September period compared to a year ago, versus 12.3% growth over the first half of this year.

That is another signal of business bosses battening down the hatches and waiting for the trade war to pass. But it also supports the view that what has made Shenzhen such a success over the longer term – the rise of private sector companies, and less of a role for state-owned enterprises – is biting back as more market-oriented firms cut back on their spending.

Of course, Shenzhen still enjoys a special status that other cities would kill for. In August the central government breathed new life into Shenzhen’s claims as a pioneer by classifying it as ‘socialist model city’ and tasking it with leading the next phase of restructuring in the nation’s economy. That is going to mean more support for sectors where it already has a competitive edge, such as IT and high-end manufacturing, as well as giving a boost to companies in sectors now deemed as strategic, like artificial intelligence, semiconductors and life sciences.

Support like this shows that Shenzhen is still a poster child for China’s senior policymakers, despite the city’s seeding of such a powerful private sector. Indeed, it’s the combination of the two forces that makes the city such a special case, mixing the free market and state-driven planning.

A final question is whether the slowdown is going to have an impact on ambitions for the Greater Bay Area. With the economies of Shenzhen and Hong Kong both showing signs of strain, two of the standard bearers for the plan could be tempted to turn inwards, slowing the seeding of a new super-cluster. Or perhaps the tougher economic times will trigger the opposite reaction: bringing new urgency, and spurring faster and deeper integration across the region.

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